Unpacking the Sustainability Landscape
GROWTH AT THE INTERSECTION OF HEALTHY FOR ME AND HEALTHY FOR WE
Consumers aren’t just demanding that companies make changes to better the world. As their conscientiousness grows, they’re also making a few adjustments themselves. The majority (73%) of consumers say they would definitely or probably change their consumption habits to reduce their impact on the environment.
That doesn’t mean every sustainability trend provides an equal opportunity for growth. There’s a wealth of sales trends globally that show that products living in the sweet spot of “healthy for me and healthy for the world” are growing in demand. As consumers weigh the choices in front of them, they view each new opportunity through the lens of convenience, price and awareness.
Consumers are becoming increasingly aware of what they put into their bodies and on their skin and are also interested in purchasing—and sometimes paying more for—products that simultaneously help the environment.
“Sustainability is a way to show consumers that you listen to them, care for their needs and are thoughtful about how you produce their products. With the right messaging sustainability can represent premium indicators such as quality, superior function, uniqueness, and are often tied to the ‘go-local’ movement,” said Crystal Barnes, SVP, Global Responsibility & Sustainability
Half of global respondents (49%) say they’re inclined to pay higher-than-average prices for products with high-quality/safety standards, which consumers often associate with strong sustainability practices. Just behind safety and function, consumers are willing to open their wallets for products that are organic (41%), made with sustainable materials (38%) or deliver on socially responsible claims (30%).
At the same time, many consumers are less picky about who is producing products that have sustainable attributes they’re seeking; potentially opening the door for non-name brands. Almost half (46%) of surveyed global consumers said the would be willing to forgo a brand name in order to buy environmentally friendly products.
The healthy for me and healthy for the world framework can be applied universally, but the nuances of each market affects what consumers care most about at the healthy for me and healthy for the world junction, and just how much they’re willing to pay for it.
SUSTAINABILITY LESSONS FOR EVERY MARKET TYPE
Winning with sustainability is more nuanced than offering an organic label or recyclable packaging. The sustainability sophistication of each market, economy, and environmental situation presents its own unique opportunities and challenges. We look at four markets in various stages to examine where fast-moving consumer goods (FMCG) sustainability trends are headed for similar markets, sharing effective strategies and watch-outs.
Succeed in sustainably-savvy countries with precise execution and innovation
France tops the list as one of the most sustainable countries in the world, especially when it comes to its food systems, ahead of Japan, Germany, Spain and Sweden according to the EIU’s Food Sustainability Index. Their aggressive approach in passing legislation aimed at tackling food waste has paid off, currently losing only 1.8% annually. Building on this progress, they plan to further slash that percentage in half by 2025. Despite slowing GDP growth in the first half of 2018, high unemployment rates and rising inflation, consumers continue to demonstrate their interest in sustainable goods through their purchasing decisions.
In recent years, the number of organic products in the French market has exploded. In 2016 alone, there was a 22% increase in assortment and the number of new organic launches doubled between 2017 and the first half of 2018. Over the past five years, sales of organic products have enjoyed a healthy growth rate, but more recently sales have spiked into the double-digits. Many of these new, organic products are sold in smaller packages and at higher prices.
Bigger isn’t always better for French consumers when it comes to organic goods. Small and private label organic brands are regularly outperforming non-organic offerings. Small brands continue to be the most prolific innovators and are taking advantage of aligning the benefits of their sustainability strategies with being local.
Private label has filled the gap by offering lower-priced but similar quality organic goods. 79% of French consumers buy both private label and branded organic items, and as a result, private label represents half of all organic’s sales. Within the private label space, organic has become a huge differentiator. Private label organics sales grew 16 percentage points faster than the overall private label category (17.1% vs 0.8%) as of August 2018. Its volume saw a similar increase (15.7%), while the overall private label category experienced a drop (-1.4%).
Other facets of sustainability are gaining popularity as well, including ‘natural’ and ‘additive free’. Despite the increase in new sustainable goods, fewer have floated to the top. In 2017 just 7% of the top 30 launches were sustainable products compared to 13% in 2016.
That doesn’t mean that sustainability is going out of style. With more products entering the scene, it’s become more difficult to capture large sales volumes. However, there are a few examples of success. When supported by strong execution and marketing, leading innovations saw sales growth rates rise anywhere from 53% to 120% after their first year.
Where sustainability is gaining steam, the landscape is becoming more competitive. This is making it harder for new innovations to break through the clutter and capture a bigger slice of sales. Brands looking to make their mark in this space must invest in testing to refine their concept, identify their differentiation points and build in long-term support for its new launches. Whether you’re private label or premium, you will need to re-evaluate your execution strategy and look at new ways to capture sales through price, promotion and engagement.
Specific-Sustainability is key in saturated and discerning markets
The United States presents a unique, but sizeable, sustainability opportunity. On one hand, it is a country marked with strong corporate social responsibility participation, an increase in ‘challenger’ brands adopting socially-charged advertising, and vocal consumer activists. On the other hand, it is consistently rated below its economic peers in sustainability indices, particularly when it comes to sustainable agriculture, climate change and inequalities. U.S. consumers worry about the economy and their own health, which manifests itself in the interesting contradiction of spending on premium fresh products and private label. In this market, the FMCG industry’s recovery has been rocky and manufacturers and retailers are feeling the pressure of consumers’ tightening belts.
Compared to global respondents, surveyed Americans are less likely to say it's extremely or very important that companies implement programs to improve the environment (68% vs 81%) or that they’ll change their own consumption habits to reduce their environmental impact (48% vs 73%). However, sustainably-minded consumers still make up a significant portion of the population and sales say consumers are committed to buying specific types of sustainability.
Millennials are already coming into their own as an up-and-coming economic powerhouse, which means companies that embody their compassionate views have an opportunity to build a strong relationship on the ground floor.
Surveyed Americans showed the highest levels of concern about water pollution and pesticide use. At the intersection between healthy for me and healthy for the world, this translates into a strong desire for ingredient transparency, support of plastic initiatives, and organic and natural products. In fact, all measured levels of sustainability and transparency are outpacing the sales of conventional products across the board.
Digging deeper into these claims, we see organic and natural products’ dollar sales are up 12% and 7.3%, respectively, versus the year prior for the period ending in February 2018. Price and accessibility play a major part in this growth. In the U.S., organics are found in nearly every channel from warehouses to value grocery chains. The markup for organics can vary from 122% for eggs to 43% in pasta sauce, but store brands are undercutting national brands with cheaper alternatives.
“Consumers who see organic store brands on shelves next to pricier brand name organics of the same product type have started to ask themselves what ‘organic’ means to them,” said Sarah Schmansky, Vice President, Nielsen Fresh/H&W Growth & Strategy, Nielsen. “The definition of organic can vary greatly between product categories, leading consumers to consider overall sustainability messaging, versus automatically accepting that they need to pay more specifically for ‘organic’ labels.”
As the natural and organic claims hit their mainstream stride, consumers are beginning to search for more clarity around sustainability messaging. It’s no longer enough to say something is recyclable, when consumers know that many recyclable items still end up in landfills and oceans. Instead, they want to know how recyclable your product is.
Nuance can be an incredibly important differentiator for consumers in markets like the U.S.. Recent Nielsen Product Insider figures for animal welfare claims showed that “farm raised” and “farmed seafood” categories saw declines of -19% and -4% respectively, while “grass fed” (+24%), “free range” (+22%) and “dolphin safe” (+4%) saw major growth.
Consumer demand for specific sustainability is even louder across the aisle in beauty care. Paraben free dominates beauty care, particularly in cosmetics and facial skin care. Here it accounts for more than half of sales and has grown over 6 pts in the last two years. “Natural” cosmetics is a bit too opaque for true beauty users and sales declined -1.2% between December 2017 and 2016, while paraben-free cosmetics grew 2.3%.
In markets where the broader sustainability claims are now ubiquitous, consumers want companies to get more specific. They know what they’re looking for - or rather not looking for. They’re getting educated, reading labels and growing increasingly critical of questionable ingredients. Companies need to truly understand what consumers care about, as it relates to their product and category, and refine their marketing and claims to clearly communicate their sustainability approach. But it’s not all marketing--embed sustainability considerations into each step of your product creation and growth strategy in order to resonate with consumers in a truly authentic way. Additionally, knowing who’s moving the sustainability landscape is critical. In some markets there’s a clear generational divide. Find people who will act as the first adopters, and bring sustainability to the mainstream.
Make a premium appeal in markets where sustainability is urgent and on the upswing
China is the world’s biggest energy consumer with significant pollution challenges, especially when it comes to air quality. But recently, the government has doubled down on sustainability initiatives — from curbing coal-fired power plants to investing in green technology.
In 2016, only 10% of Chinese companies had corporate social and environmental initiatives according to the corporate sustainability consulting firm SynTao. Just one year later, Bloomberg data showed the ESG-reporting corporations in the top tenth percentile were already seeing a big upside, gaining 33% and outperforming the Hang Seng China Enterprises Index by 17 percentage points.
During this same time period, Chinese consumer confidence, willingness to spend, and eco-mindedness also grew. In fact, 41% of consumers say they want eco-friendly products. This new mindset plus government incentives has sent the sales of new energy vehicles soaring to 138.4% year over year as of April 2018 according to the China Association of Automobile Manufacturers (CAAM).
Retail consumption, particularly of premium goods, remains the primary economic driver, giving Chinese consumers significant influence. At the shelf, healthier, high-quality products that enable them to lead better lives are getting more attention.
Healthy is intersecting with sustainability, sending consumers reaching for products with natural ingredients or no additives and organic certifications.
Consumers are associating these healthy and sustainable attributes with premium indicators: superior functionality (health) and high-quality ingredients. In an environment where expectations for premium products have grown across the board, these two factors remain the most important.
Healthy and green products—a small but mighty population—are driving growth across categories and commanding a higher price. A prime example is super premium facial care, which is personal care’s fastest growing and largest price segment. Here, natural ingredients are the second most preferred ingredient, comprising of 23% of value share. This is quickly becoming a competitive space, with new launches in personal care accounting for 40% value growth in personal care.
This trend has repeated itself in baby care. Again, organic is small but swiftly growing, by 53% and 49%, respectively, in infant food supplements and formulas. Organic baby cereal with multiple organic ingredients is seeing similar trends and growing in the double digits.
In markets where consumers are quickly gaining affluence and are looking for ways to make their lives better, “healthy for me and healthy for the world” products provide an excellent opportunity for premiumization. To do this, companies must connect sustainability factors to premiumization indicators that appeal most to these consumers. Being quick to market, but with a quality product, is important to being able to maximize the growth opportunity before the space becomes too crowded. As competitors flock to the sustainability space, brands need to keep execution top of mind and evolve as their consumers do in order to stay relevant.
Keep it simple in new sustainability markets: be available on shelves and help consumers see themselves in sustainability
According to the World Health Organization, India is home to 11 out of 12 of the cities with the highest air pollution in the world. While the government has started to take steps to reduce both air and water pollution, even mandating that companies above specific fiscal benchmarks must donate 2% of their net profits to charities, it still ranks low on food sustainability and sustainable agriculture practices in global indices.
Indian consumers have been emboldened by the recent positive economic environment, discounts and promotions, and have provided a boost to the FMCG market. With their standard of living improving, they are seeking out more premium goods and products that are personally and environmentally safer. In fact, global warming is consistently one of the top three concerns for Indian consumers, behind job security and the economy. Modern trade channels, like supermarkets and hypermarkets, are offering a wider variety of goods, and allowing Indian consumers to express themselves in the products they purchase. While modern trade currently only represents 9% of the Indian channel mix, it is growing nearly twice as fast as their traditional competition.
The personal care category in India shows one way that it’s consumers are demonstrating a personal commitment to sustainability in the products they buy. Despite significant price increases in the category at the time, in March 2018, year over year sales growth in natural products (+19.6%) far outpaced non-naturals (+7.6%). Volume sales of natural products were unaffected by this price increase, growing 13.1% compared to non-natural’s 1.2%, underscoring consumers’ monetary commitment to sustainable products.
Local companies in this category have been quick to capitalize on their sustainably-minded consumers, and as a result, their products have grown to make up 81% of the naturals market. Recently, many multinational companies have launched line extensions in the market, but core natural brands are seeing double the growth of line extensions.
In the past two years, local Indian and global multinational companies have experienced a parallel value growth trajectory in the naturals category, but local companies have been able to grow to a much higher rate, comparatively.
Sustainability provides an immense opportunity for growth in many emerging markets. As the standard of living improves, consumers are eager for better, healthier products. This is especially true in regions where pollution levels are high and are having a direct impact on consumer health.
Global multinationals must be quick so as not to miss this opportunity and utilize their existing advantages in scale, distribution and marketing. These companies should also consider the authenticity and credibility of a line extension over a purely sustainably-focused brand.
Local brands, with their pulse on the consumer, can quickly capture the sustainability market by leaning on their speed and market knowledge. If these companies can strike quickly, while the market is hot, they take advantage of the big growth gains. To stay competitive, they’ll need to ensure their product maintains its quality and integrity, as well as continue to support these products with the right execution and marketing.
These case studies highlight that around the world, the push for sustainability remains strong, especially at the heart of what’s healthy for consumers and healthy for the world. The entry level point for nearly every market largely leads with natural and organic ingredients and certifications, then becomes more specific and fragmented.
Companies that hope to succeed should start by identifying the existing level of market saturation in these products and the level of scrutiny placed on them by consumers.
In sustainably sophisticated markets, companies must focus on fine-tuning their product in order to stand out and support these new innovations with the right marketing and promotions. What clicks for these consumers will vary based on their current economic standing and sustainability mindset.
In developing markets, sustainable efforts are still in their relative infancy, and consumer demands aren’t nearly as nuanced. This presents a golden opportunity for companies to build trusted relationships with consumers who care, and develop loyalty to reap long-term benefits as they continue on the path of environmental responsibility.